Samuel Estreicher and Holly H. Weiss

On Wednesday, April 24, 2019, the U.S. Supreme Court issued an opinion in Lamps Plus v. Varela, 587 U.S. ___ (2019), holding that courts cannot construe ambiguous arbitration clauses to permit class arbitration. The decision follows from the court's 2010 decision in Stolt-Nielsen S.A. v. AnimalFeeds Int'l, 559 U.S. 662, 668 (2010), in which the court held that courts cannot compel class arbitration when an agreement is silent on the availability of class arbitration. In that case, the parties had entered into an arbitration contract that permitted individual arbitration but stipulated that the agreement was silent about class arbitration. The Stolt-Nielsen court emphasized that the core benefits of arbitration consist of its informality which allows for greater speed and efficiency with lower costs. Class arbitration, by contrast, did not offer the same benefits and introduced new risks. As the court would later explain in Epic Systems v. Lewis, 138 S. Ct. 1612, 1623 (2018), with class arbitration, “the virtues Congress originally saw in arbitration, its speed and simplicity and inexpensiveness, would be shorn away and arbitration would wind up looking like the litigation it was meant to displace.” Because of the “risks and costs for both sides” inherent in class arbitration, consent to individual arbitration cannot be read as tantamount to consent to class arbitration; “courts may not infer consent to participate in class arbitration absent an affirmative 'contractual basis for concluding that the parties had agreed to do so.'” Lamps Plus, 587 U.S. __ (quoting Stolt-Nielsen S.A. v. AnimalFeeds Int'l, 559 U.S. 662, 684 (2010)).

Under Stolt-Nielsen, “[s]ilence is not enough; the “FAA requires more.” Id. at 687. Under Lamps Plus, ambiguity will not suffice to provide a basis for inferring consent to class arbitration, even with the aid of the longstanding state law contract rule that ambiguity in a contract should be read against the drafter of the agreement.

Lamps Plus is a company that sells light fixtures. In 2016, a hacker obtained the tax information of approximately 1,300 Lamps Plus employees. Frank Varela was one of those employees. He filed a class action lawsuit in federal court after a fraudulent federal income tax return was filed in his name. Lamps Plus moved to compel arbitration, which the district court granted, because Varela had signed an arbitration agreement. The court, however, rejected Lamps Plus's request for individual arbitration and instead authorized class arbitration. Lamps Plus appealed that decision to the Ninth Circuit, arguing that the district court had erroneously compelled class arbitration. The Ninth Circuit affirmed the order compelling arbitration on a class wide basis. Because the district court had also dismissed Varela's claims, appellate jurisdiction was found notwithstanding §16(b) of the FAA (“an appeal may not be taken from an interlocutory order … directing arbitration to proceed”).

The Supreme Court overturned the Ninth Circuit, 5-4, with Chief Justice Roberts writing for the majority. The court began by noting that the FAA requires courts to “enforce arbitration agreements according to their terms” and that the FAA preempts state contract principles “to the extent it stands as an obstacle to the accomplishment and execution of the full purposes and objectives of the FAA.” Lamps Plus, 587 U.S. __ (internal citations omitted). Further, “[c]onsent is essential under the FAA because arbitrators wield only the authority they are given.” Id. Because of the “crucial differences” between individual and class arbitration that the court described in Stolt-Nielsen, the court emphasized that “there is reason to doubt the parties' mutual consent to resolve disputes through classwide arbitration.” Id.

Like the silence in Stolt-Nielsen, ambiguity is an insufficient basis to conclude that parties have consented to class arbitration when class arbitration sacrifices the benefits that individual arbitration offers. Moreover, the California rule that ambiguity should be construed against the drafter applies when the language is ambiguous—or, in other words, when the intent of the parties is unknown. Construing an ambiguous arbitration agreement to allow for class arbitration when the true intent of the parties is indiscernible is inconsistent with the FAA. As the court held, “[c]ourts may not infer from the ambiguous agreement that parties have consented to arbitrate on a classwide basis.” Id.

Justices Ginsburg, Breyer, Sotomayor, and Kagan filed separate dissenting opinions.

Lamps Plus sends a strong signal that courts cannot order class arbitration absent an affirmative contractual basis for doing so. The court is also suggesting a broader scope for FAA preemption of state law even when the state law, as in this case, did not discriminate against arbitration.

Samuel Estreicher is the Dwight D. Opperman Professor and Director of the Center for Labor and Employment Law at New York University School of Law. Holly H. Weiss is a partner at Schulte Roth & Zabel.